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Polaski Company

Managerial Accounting - Problem 13-23

Polaski Company

Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 30,000 Rets per year. Costs associated with this level of production and sales are given below:

Unit Total
Direct materials $15.00 $450,000
Direct labor 8.00 240,000
Variable manufacturing overhead 3.00 90,000
Fixed manufacturing overhead 9.00 270,000
Variable selling expense 4.00 120,000
Fixed selling expense 6.00 180,000
Total cost $45.00 $1,350,000

The Rets normally sell for $50.00 each. Fixed manufacturing overhead is constant at $270,000 per year within the range of 25,000 through 30,000 Rets per year.

Required:

1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski Company is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

2. Refer to the original data. Assume again that Polaski Company expects to sell only 25,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 5,000 Rets. The Army would pay a fixed fee of $1.80 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Since the Army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year?

3. Assume the same situation as that described in (2) above, except that the company expects to sell 30,000 Rets through regular channels next year. Thus, accepting the U.S. Army's order would require giving up regular sales of 5,000 Rets. If the Army's order is accepted, by how much will profits increase or decrease from what they would be if the 5,000 Rets were sold through regular channels?

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1. Assume that due to a recession, Polaski Company expects to sell only 25,000 Rets through regular channels next year. A large retail chain has offered to purchase 5,000 Rets if Polaski Company is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain's name on the 5,000 units. This machine would cost $10,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted.

First, you need to find the profit before the special order is accepted. The sales and all variable expenses will be calculated based on 25,000 units while the fixed manufacturing overhead and fixed selling expense will remain the same. From the calculation in excel file, we can see that the net income is $50,000.

Then, we will include the special order into our calculation. We will include the price of the special ...

Solution Summary

This solution is comprised of a detailed explanation to help Polaski Company consider as to whether they should accept special order.

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